Under the Radar: The Governor’s Tax Plan Quietly Cuts the Alternative Minimum Tax
Tax Package Costs at least $30 Million More than Generally Acknowledged
Descriptions of the Governor’s tax plan by the executive branch and the media have pretty consistently understated both the total cost and the amount of the income tax portion of the tax cutting that will benefit wealthy Wisconsinites. The reason for that is that the Governor and most reporters have failed to point out that part of the plan is a set of changes in the state’s Alternative Minimum Tax (AMT). Within a few years that part of the Governor’s proposals will increase the size of the income tax cut by about 50%, but it will only benefit a relatively small number of wealthy state residents.
In his “state of the state” address a few weeks ago, Governor Walker described his income tax plan as providing a $58 savings to a family of four making $40,000, and he added that “no one will get a bigger savings than that.” That would have been an accurate assessment if the Governor had made it clear that he was talking about just a portion of his income tax plan, but he seemed to be describing the full plan. In fact, the Governor’s speech failed to even mention the proposed changes to the AMT, and his omission has carried over to nearly all of the press coverage of the two special session bills, which are being taken up by the full Assembly this Tuesday, February 11. (One article that does a nice job of explaining the AMT issue is this Capital Times story by Mike Ivey.)
One effect of the nearly total absence of any discussion of the tax cuts for the wealthy provided by the AMT changes is that the press corps has generally been understating the price tag for the proposed tax cuts by not counting the cost of the changes to the AMT. Although reporters have typically been saying that the tax cut in the current budget period is slightly over $500 million, the AMT changes bring the net total to about $537 million (not counting the $20 million tax amendment added to the bill by a committee last week, or the added cost of the proposed changes to the tax withholding tables).
According to the Legislative Fiscal Bureau analysis, the cost of the changes to the AMT will grow to $40.5 million in the first year of the next biennium, and then $50.8 million in 2016-17 and thereafter. It appears that the average value of the proposed AMT changes in tax year 2015 will be more than $1,000 for the 30,000 people who under current law would be subject to the AMT that year.
The reason for the sharp increase in the cost of the AMT changes is that the state is phasing in a large new corporate tax break, known as the manufacturing and agriculture credit. All Wisconsin manufacturers are eligible for that credit, but those that are organized such that the profits and taxes flow through to the owners are potentially subject to the alternative minimum tax, which can offset some of the value of the credit. The proposed changes to the AMT allow those business owners to potentially zero out their individual income tax liability.
Unfortunately, the LFB paper does not shed light on the income distribution of the AMT changes, nor does the analysis by the Institute on Taxation and Economic Policy (ITEP), which examined the distribution of the property tax cut and the $99 million cut from the change in income tax rates. Even without factoring in the AMT changes, ITEP calculated that the top 5% of Wisconsinites, who made $161,000 or more in 2013, will get 18% of the proposed tax cuts, whereas the bottom 40% get just 15% of the benefit. (Read more here.)
It’s unfortunate that the Governor’s silence on the AMT issue seems to have kept that part of his plan off the radar of most reporters.